Although Social Security has worked for
decades, this "pay-as-you-go" system where the current
workforce pays the tax revenues to provide retired Americans with
an income will only operate smoothly as long as working men and
women greatly outnumber the retired.

Social Security's architects never anticipated
the baby boom generation or increased life expectancies. This
demographic shift has created a financial crisis now threatening
the economic safety net so many people are relying on for their
golden years.

To solve this impending crisis, the government
should seriously consider proposals linking retirement security
to market forces: proposals that are already being successfully
applied in other countries.

According to the National Center for Policy
Analysis (NCPA), there were five workers paying into Social Security
for every one retiree in 1960. Right now, that ratio is just over
three-to-one. It is expected to fall to two-to-one by 2030. At
this rate, the Cato Institute figures Social Security will be
bankrupt by 2012, possibly even by 2006. By 2020, Social Security
could run a deficit of $232 billion with the potential grow to
$160 trillion by 2075!

How would privatization save retirement
security? NCPA's Merrill Matthews Jr. proposes allowing workers
to choose where their Social Security taxes are deposited. His
plan would allow working individuals to direct their 12% payroll
tax into a private account that could be invested in private sector
assets, stocks and bonds. Individuals would also have the option
of remaining in the current system. Matthew's plan would retain
and secure benefits for current retirees and those near retirement
age. Matthews says his plan would "solve the financing problems
while ensuring the safety and solvency of seniors' retirement
accounts."

A Cato Institute plan would put Social
Security taxes into private accounts that individuals can choose
without government intervention. Current retirees and those near
retirement could remain in the current system, while people now
in the workforce would continue paying their Social Security benefits.
Everyone under a yet-to-be-determined age (probably around 32)
would instead put their money into private investments.

The Cato Institute points to the past
performance of the stock market to soothe the apprehensions some
people have about market volatility and uncertainty. Past stock
market performance between the years 1926 and 1996 show an annual
nominal return of 10.89% and 7.56% when adjusted for inflation.
Some may also be concerned about a stock market crash nearly eliminating
an individual's retirement plan. Once again noting long-term trends,
the Cato Institute notes stocks have out performed government
bonds 99.38% of the time for all thirty-year periods.

Concerns about stock market volatility,
however, need to be balanced by concerns about the volatility
of the existing Social Security system. Congress has the ability
to cut Social Security benefits or lower the amount of tax money
put into its trust fund at any time. For decades, Congress has
added to Social Security's instability by spending the Social
Security trust fund on other programs. Nothing underscores Social
Security's volatility more than the fact that it is currently
expected to be bankrupt within a generation.

A handful of nations are currently experimenting
with private sector social security investments with great success.
Chile, a trailblazer in social security privatization, offers
its workers an option to deposit 10% of their annual income into
various financial plans that have been approved by the government.

According to the NCPA, approximately 93%
of Chileans are putting their money in the new program. The savings
rate in Chile has risen from 10% to 27%, and worker retirement
accounts are averaging 12% returns on their investments. Individuals
receiving disability benefits from the privatized accounts have
seen their benefits increase by 50%, as have those receiving survivor's
benefits. Chile's success has led Peru, Mexico and Argentina to
adopt privatization as part of their social security plans.

Reform of Social Security will mainly
benefit those in the lower economic strata by allowing them to
take advantage of compounded interest that usually only those
with higher incomes enjoy. Senator Rick Santorum (R-PA) has said,
"It is important that we understand that the people that
[privatization] helps are not wealthy, but low-income people and
minorities."

Solid international evidence that privatized
Social Security works has empowered proponents and allowed them
to become the most influential voices in debate over the future
of Social Security. Individuals such as Sen. Paul Wellstone (D-MN),
a privatization opponent, has stated, "We are now behind
the eight ball. They have done a masterful job."

# # #

Glen Turpening is a research
associate of The National Center for Public Policy Research. Comments
may be sent to [email protected].